Research Assessment #1
4 September 2017
Business Finance
Iskold, Alex. “The 7 Sources of Startup Capital.” Entrepreneur, 11 Nov. 2015,
www.entrepreneur.com/article/252676.
Assessment:
Being pretty confident on my study of business finance, I thought most of the work was more within the actual running of the business and raising revenues to the peak. I was amazed when I read about business finance containing different steps to reaching the top of the chain. The biggest problem I will face within this career is getting the money in the first place. After reading the article, “The 7 Sources of Startup Capital,” It taught me seven different ways in which to obtain money to achieve a boost to my business in the future such as family, Angel investors, Angel groups, Syndicates, Micro VCs, VCs, and Mega VCs.
To begin with, the easiest way to get money for a company is to ask friends and family. I for one, have known of this type of investment and am most familiar with this type of offer because my family started up their business of hotels by acquiring money from a friend. After leaving Africa, my great grandfather came to Longview Texas and opened up a hotel: Sunset Inn. I wish I was alive to witness the booming of a company, but I have heard stories of how my great grandpa gave his friend ten times the amount of money he received. However, I do not wish to do my business that way. This article raised my eyebrow at the concern of money. Although I can easily get to my family or friend, I would never risk my relationships with people within this business, which is the risky part about starting this career.
Second and third on the chain of investors are the Angel investors and groups. What intrigues me about these groups is there’s not many ways to get these investments done. Basically, only if the person or group is interested in putting their money onto a company or interacts with the company more than once, then that is when the green light is given to ask for an investment. I had a connection with these type of investors because after reading about these groups, it automatically reminded me of Sharktank. Reading through this section gave me a broad understanding of why Sharktank was created. All those high-rollers like Mark Cuban invest about fifty to five-hundred thousand dollars into several companies, correctly matching what Angel groups do. I like the idea of not allowing people to set appointments to ask for loans and investments because it lessens the amount of time being wasted on crook people begging for money. In my opinion, Angel investors are my favorite out of the seven groups because I personally like approaching a business and acquiring a real taste or how the company works instead of them coming up to me. As my mentor this year, I hope to find an Angel investor because I am leaning towards this as my top notch choice of career.
As the chain continues, Angel Syndicates are one of the high-end investors. They have a decent amount of money to blow around and test companies. From previous knowledge, these are the investment groups that usually know which companies they want to put their money down on. In my opinion, I feel like these groups do not really take risks in using their money because they take the investments slow. They take their investments slowly, meaning they will invest a certain amount at the start and if the company is successful, they will put more money down. These offers range from a hundred to a million dollars. I love the idea of taking money slowly because growing up, my dad always told me that “money comes and goes. It is something that never stays.” I took it as advice and I do not really want to bet all I have to offer at once because then It is like playing a casino game. As the chain of investors leads to the top, the more professional and serious things get.
The top investors are VC groups. First, the Micro-VCs, are investments groups that range from ten to fifty million dollar groups. I don’t think there is any ways for just one person to reach this type of money alone, so I believe strongly in partnerships if I ever reach this line of money. It is my job to make my dream a true one which is why I hope to become a Mega VC who have more than a billion dollars of profile. Once somebody has that amount of money, there is no reason for them to just stop earning that money and keep going. That’s the way I think about my career; once I start receiving my paychecks, I want to continue becoming successful. Reading about these VC companies gives me motivation to live the life they live. Although I may be in high school, it only gives me more motivation to start now then begin with the rest of the population. The part I like about these type of investors is that they buy shares in companies ranging from fifteen to twenty percent ownership in companies. This idea helps me feel as if I own something worth money instead of they owe me money.
All in all, the roughest part about this business is knowing that I owe somebody money or they owe me money. This thought is something that questions my risk-taking ability and how good they presented the information to me or how well I presented the idea to whoever them may be. What I do not know yet, is whether I want to be that investor or startup my own business using an investors money. This article gave me more benefits than the doubts because now it lessens my stupidity on who I attempt to get my money from if I choose to take that path. I learned about certain examples of money failures and gains which helps me develop a straight path without stop signs blockading me from success. Before reading this article, I had no clue how investing worked and who to get the money from. It made me place a visualization in my head of me being declined by a Mega VC investor, only asking for thirty thousand dollars. The doubt of this article was the lack of confidence in the person who wrote this article. After reading the article, I could automatically sense that the author experienced many investing failures. I could almost feel the guilt in all the information he wrote about. Overall, I learned more through this article about investing.
Annotations of Article:
When thinking about funding for your startup, it is important to understand different types of potential investors. Not every wallet is right for you.
Figuring out who to raise money from and why will save you time and yield better results. Here are some potential investors to consider for your startup:
1. Friends and family
Often, the first check comes from a family member or a friend. In theory it is a lot easier to close them because they already know you. In practice sometimes this is awkward, and may lead to awkward situations in the future. For example, if a friend gives you $10,000 and the company goes belly up, you may lose this friend. [Office1]
Think carefully before taking money from family and friends. It can be awesome or could be bad. Every situation is different. Another thing is that friends and family members may not clearly understand the risk and how startups work. Take the time to educate them, and if they get it and still want in then you are all clear. [Office2]
2. Angel investors
Angel investors put in between $10,000 to $100,000 (lower is more common), and can participate in priced or debt rounds. Angels can be valuation sensitive. It is important to distinguish between active or professional and occasional angel investors.
Ask them how many deals they do per year, and look them up on AngelList[Office3] . If someone only does a few deals a year, only talk to them if they approached you, someone gave you a warm intro or they have relevant experience and background in your space. Otherwise, infrequent investors should not be on your target list. Occasional angels will take longer to close, and will be more flaky.
Active or professional angels do at least six deals per year[Office4] . Expect to close them within the first three meetings. It is totally fine, and a good idea, to ask them if they are interested at the end of the first meeting.
Before you meet an angel understand what they are interested in. Don’t go after people randomly. It will be a waste of time. Confirm with whoever introduces you that the introduction makes sense. Target well.
3. Angel groups
An angel group, as the name implies, is a pool of investors sharing deal flow[Office5] . Angel groups can do priced rounds, and if a significant percentage of the angels in a group are interested, they can lead your deal.
Angel groups meet regularly, and have regular pitch processes. Some do more due diligence than others, but typically several members of the group would be assigned to do the diligence if your initial pitch goes well.
Your check will typically range from $50,000 to $500,000. These groups are not syndicates, and unlike AngelList syndicates, they don’t have carry fees. Angel groups are also valuation sensitive, and will typically price the rounds lower compared to venture capitalists.
4. AngelList syndicates
AngelList syndicates are the most effective way these days to raise money on AngelList. Syndicates are formed by influential angels[Office6] and investments range from a few hundred thousand dollar to more than a million. The key thing is to identify investors who have significant syndicates on AngelList and get in front of them.
If you can get such angels excited, he or she will run the syndicate[Office7] . For example, the angel might put in $50,000, and then another $250,000 will come via a syndicate. The amount raised via syndicates varies, and is not guaranteed.
5. Micro VCs
These investors are either individuals writing $100,000 or more checks or a firm with $10 million to $50 million under management. They are basically angel investors with larger amounts to invest. They will commit to invest or will say no after two or three meetings. They may lead, and be comfortable with either debt or equity.
Micro VC funds will likely take longer, and would not be too far off from a typical VC. Micro VCs in New York City typically invest $250,000 to $500,000 and can price and lead your round.
These investors care about ownership, but to a lesser extent than a typical VC. They are not looking for 20 percent of your company, but more likely 8 to 10 percent and then invest more in the next round (depending on the size of their funds).-([Office8]
Like with angels, you need to decide if a specific micro VC is right for you. Spend time studying their portfolios. Not only do you need to understand each fund, you need to understand each partner. Partners have different experiences and focus areas and different preferences for companies as well. Target specific partners at a specific fund.
6. VCs
Traditional VC firms have funds ranging from $100 million to $500 million. For seed deals, they would do as low as $250,000 to as high as $2 million. Typically, between $500,000 and $1 million is these investors' sweet spot. They really care about percent of ownership, and would likely only do the seed if they think they can do series A as well. That is, they would want to buy up the ownership to be at 15 to 20 percent after a series A round.
Note that some funds may not have the capital because they are in between funds, but they would spend the time with you anyway. It is probably not the best use of your time though.[Office9]
Figure out who will be the partner on the deal. With larger firms it is not always obvious. Look at how many companies they are involved with and ask them how many companies they typically manage. In a $150 million to $300 million fund, a partner is investing in eight to 12 companies at any given time. Research how many investments the partner has to understand your chances.
Ask them what their process is like and how to best follow up. Each firm may have a unique process and you need to understand it up front so you can know what to expect. Set up clear next steps and follow ups. Be direct, and ask if they are interested in continuing the conversation. Try to avoid the vague state of maybe.
7. Mega VCs
Mega VCs are firms that have more than $1 billion under management. These include Andreessen, Khosla, Kleiner Perkins, Sequoia, Bessemer[Office10] . Research if the fund has a seed program. If they do, figure out who runs it and what the process is.
It is likely that there is a partner in charge of seeds and the process is compressed compared to raising more capital.
Recognize that VC funds need to deploy large amount of capital per deal to be able to return their massive funds. Rather than spending time trying to get their attention for your seed round, it may make more sense to start building relationships with them for a series A and B round.
[Office1]My family has experience with this type of investment and I have witnessed what happens. It is a 50/50 risk
[Office2]Prepare a business plan and guide them through the benefits and negatives of a plan before using their money to help you add money to your account)
[Office3]A website used to help seek investors for your business
[Office4]Educated investors who will give their money out wisely, but I assume these six deal per year give them wealthy profits
[Office5]Similar to Sharktank
[Office6]Common word used to associate with the hierarchy of investors
[Office7]It is important to wow the investors to give them a good message in which they will feel confident towards you
[Office8]Micro VC’s gradually in a company which is smart because they will observe how the company does before putting all bets in
[Office9]Hard to achieve and get their approval
[Office10]Large investor companies at the top of the line for investing
